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GDP: dire figures – and may be about to get worse

This depression will not be as severe as the Great Depression, but – because of similar policies now as then – it is likely to last even longer.

Just over one year after the Coalition announced its first Budget, the British economy is stagnating. In today's preliminary estimate of second quarter GDP, growth was just 0.2%. The previous six months registered no growth at all. So in the three quarters since the government's Comprehensive Spending Review, this latest figure represents the sum total of economic growth: 0.2%.

By contrast, in the three quarters preceding the CSR the economy had grown at a more or less respectable rate of 2.1%. This is in sharp contrast to current performance which now reflects the effects of swingeing cuts to public spending and the wider impact that has on the economy. 

The difference is tangible in real, monetary terms. In the nine months since the CSR, the economy has expanded by just £660m, compared to £26.7bn in the preceding nine months. No wonder most households and businesses feel poorer and gloomier.

The situation may be about to get worse. Economies only respond to policy changes after a certain time lag. Most of the cuts did not take place until the beginning of the financial year in April.  The depressing effect of those cuts is only beginning to be felt and is likely to increase throughout the rest of this year.

Just as the current stagnation is caused by government spending cuts, it should be noted that that the prior recovery was in response to the increased spending of the previous government. This led to economic recovery, which was then reinforced by businesses increasing their investment and households increasing their consumption. Both of these have now started to fall in response to current policies.

As a result, despite the fact that the recovery began at the end of 2009, GDP output is still 3.9% below its peak level. Other European economies such as Germany and Sweden have long since recovered all the output lost in the recession, by taking precisely the opposite course. Growth was stimulated via a series of measures, most especially by increased government spending. The consequence is their public sector deficits are falling, while in Britain the official forecasts for the deficit are being revised upwards. The reason for this is simply that tax revenues here continue to disappoint as growth remains elusive.

We are now entering the fourth year since the recession began. In the Great Depression of the 1930s it took exactly four years for the previous level of output to be restored. It seems extremely unlikely that the economy will grow by close to 4% by the first quarter of 2012. This depression will not be as severe as the Great Depression, but – because of similar policies now as then – it is likely to last even longer.

Michael Burke is an economist and blogs at Socialist Economic Bulletin.


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